Is Singapore Shipping Corporation A Value Play?

There were 2 things I learnt in the course of analysing Singapore Shipping Corporation (SSC). Well, it’s actually only 1 main thing, and that is while an investor should definitely have a common framework of analysis, he or she should be flexible to recognize when it is no longer applicable. In the case of SSC, I felt that circumstances warranted the breaking of 2 of the usual value investing philosophy.

Ignoring historical performance

Value investors have typically emphasized on looking at historical, normalized performance as a yardstick of future business performance. Unsurprisingly, the assumption is that the future environment will be somewhat similar to the past. Singapore Shipping Corporation is one of the rare instances where circumstances are going to change so drastically that the past is absolutely irrelevant. Looking at SSC’s 3-year performance, the indicators are actually pretty attractive.

ROA and ROE indicate stable profitability. It is evident that the prudent management has been conscientiously paring down debt. Cash generation is strong with a 3-year average of 10.3%, implying that 3.4% dividend yield is sustainable. Current PE of 11.7x and EV/EBITDA of 6.8 also suggests that the stock is inexpensive.

Unfortunately, since the 2014 figures were released, the company has decided to double its fleet size from 3 to 6 with some of them being almost fully funded by debt. All in all, the company is expected to take on SGD93m more of debt versus its current total borrowings of SGD15.8m. The Singapore Shipping Corporation of tomorrow is clearly going to be a different creature with respect to profitability and solvency. It will be foolhardy to insist on evaluating it on our usual framework of historical performance.

Forecasting and discounted cash flows

It seems almost blasphemous to suggest this, but there are situations where forecasting and a DCF valuation actually make sense. When historical performance is no longer a relevant benchmark for the future, there is a greater need for forecasting. However, that alone is not enough to justify such an endeavour. The nature of the business also has to be predictable enough to warrant simple back-of-envelope calculations. These conditions are met for SSC where the contract duration, contract value, fleet life span can be estimated with a sufficient degree of certainty. While details for the charter contracts of the new ships are not fully disclosed, what is important is that the contracts have already been confirmed. Under such a scenario, forecasting is a significantly less speculative exercise. All we have to do is to estimate the shipping rates of the new ships, and this we can more easily do based on the historical rates. The very conditions that make it ripe for forecasting are also the ones that make it suitable to use a DCF valuation. Anyway, these are the results for those who are interested.

Final words

Technicalities aside, this illustrates why as investors we should always strive to learn and to always keep learning. Every new framework or method of analysis that we learn is another tool in the bag. Even the most obscure tools will have their uses someday.